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Fixed Income Unit Investment Trusts (UITs)

A unit investment trust (UIT) is a fixed package of stocks or bonds. An investment professional picks the stocks and bonds based on the UIT's goals. When a UIT owns bonds, it's called a fixed-income unit investment trust. Fixed-income UITs are typically categorized into "taxable" or "tax-exempt." Taxable trusts own corporate, U.S. government or taxable muni bonds, and tax-exempt trusts generally own tax-exempt municipal bonds.

Important considerations

Take into consideration your investing time horizon.

Understand that UITs are professionally selected but not actively managed.

Remember that fixed income UITs can offer a transparent, diversified portfolio of bonds.

Know the costs of owning UITs and the alternatives.

Keep in mind, there is no assurance or guarantee that any UIT strategy will achieve or maintain its investment objective.

Investors choose Fixed Income UITs for a few reasons:

Diversification – Because each fixed income UIT typically holds at least 20 bonds, you get instant diversification, even if you only buy one UIT. And not only does a UIT hold multiple investments, the investments can also be from a wide variety of issuers, sectors or geographies.

Professional portfolio construction – Remember, fixed income UITs are portfolios of professionally selected bonds picked by an investment professional with the UIT's goals in mind.

You know what you own – After an investment professional chooses the initial stocks and bonds, they typically don't change. You know exactly what bonds you are buying, so you can look for fixed income UITs that hold issuers you're already familiar with and like. Some investors prefer this kind of control.

How are fixed income UITs different from mutual funds?

You may be thinking that UITs sound very similar to mutual funds. However, there are some key differences. Like mutual funds, fixed income UITs are portfolios of professionally selected stocks or bonds. However, unlike mutual funds, UITs are fixed – which means once those bonds are chosen, they typically don’t change. Because these securities aren’t actively managed, investors have more visibility into what they own. UITs can usually be sold on any business day at the current market price, which may be more or less than what was paid initially for the investment.

Risks:
Since fixed income UITs contain professionally selected bonds but do not provide ongoing management, bonds that may fall out of favor in the market will not be sold. Fixed-income UITs contain bond investments that are subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease. If a bond within a UIT is called, the principal will be returned, subjecting the investor to reinvestment risk. Also, bonds in UITs are subject to credit risk, as prices can fluctuate based on market concerns about financial condition, and the issuer may not be able to pay interest or repay principal. UITs holding fewer securities could have more price volatility than more diversified trusts with a greater number of holdings. Review the prospectus for a discussion of the risks associated with the specific UIT strategy you are considering.